Dyson is considering changing the credit term for its customers and also enforcing its credit policy more strongly. Dyson’s annual sales is $13 million and the current credit term is 3/30, net 45. Right now, 10% of the customer paid by cash, 20% of the customer paid in Day 30, 50% of the customer paid in Day 45 and still take the discount (which they shouldn’t), and 20% of the customer paid late in Day 55. Dyson wants to change the credit term to 5/10, net 30. It believes the stricter enforcement of the credit policy will result in a 2% decline in annual sales. Under the new policy, 10% of the customer will still pay by cash, 60% of the customer will pay in Day 10, and 30% of the customer will pay in Day 30 and Dyson will ensure these customers don’t get the discount. As a result of trying to enforce the new policy, Dyson expects to incur extra legal expense of $50,000 to warn customers who don’t comply with the new policy. Bad debt is currently sitting at 3% of credit sales and Dyson estimates that bad debt would reduce to 1% of credit sales under the new policy. Dyson’s profit margin is 35% and it has a line of credit with the bank charging an interest rate of 9%. Should Dyson change its credit policy?

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Annual Sale is Credit terms 10 of Customer 20 of Customer 50 of the Customer 20 of the Customer Bad ... View the full answer